Facebook investors hope wild ride ends soon

NEW YORK (Reuters) - Facebook shares (FB.O) were plunging as some investors waited for the social media giant’s first earnings report later on Thursday and others jumped into options trying to hedge their bets in anticipation that the stock would find its right price.

Facebook shares were down 6.7 percent in active trading ahead of its results. The surge in action is partially due to the grim outlook from game development company Zynga Inc (ZNGA.O) whose games such as “FarmVille” and “CityVille” made up more than a tenth of Facebook’s revenue last year.

Zynga shares were getting hammered, losing 39 percent to $3.09 a share. The stock has now lost nearly 70 percent from its initial public offering price of $10 in December.

Meanwhile, options trading volume in Facebook jumped just hours before the company’s first quarterly performance report as a public-traded company.

Facebook was the fifth heaviest-traded stock on the Nasdaq with volume of 19.2 million shares, compared to a 10-day average of 15.8 million shares. The stock was off 4.3 percent at $28.06.

Implied volatility on Facebook options was at an all-time high as volume surged. About 65,000 calls and 68,000 puts traded in the morning, above an average daily volume of 127,000 contracts, according to options analytics firm Trade Alert.

“The market has never received any guidance from upper management of Facebook on issues that have been concerning to the market. No one has come out to calm the waters and today’s report will be doing just that,” said Brian Overby, senior options analyst at TradeKing.

More noteworthy was the heavy selling of out-of-the-money calls and out-of-the-money puts in Facebook - options contracts with strike prices that are significantly above (for a call option) or below (for a put option) the market price of the underlying asset.

These are basically contracts without any intrinsic value. Selling out-of-the-money options contacts is a strategy used to increase an investor’s return for stocks that are stalled, or expected to trade in a narrow range.

It suggests investors believe the first two rocky months of Facebook action, which saw the stock fall as far as $25.52 after debuting at $38 a share, will finally ease.

“Up until now, trades on Facebook have been all over the place, literally. But today, we are seeing a lot of selling of the out-of-the money calls and out-of-the money puts,” Overby said, suggesting options investors are expecting Facebook to settle at a price range that is considered “right.”

Zynga, which disappointed the market with quarterly results that badly missed Wall Street targets and slashed its 2012 outlook, had the heaviest volume on the Nasdaq, with about 60 million trades, compared to 10-day average of 21 million.

Option volume was running 2.1 times the average daily turnover with 26,000 puts and 32,000 calls traded in the morning, according to Trade Alert.

Despite the steep decline in their share prices, Facebook and Zynga are both trading well above their market valuations, based on StarMine analysis.

Facebook is trading at around 70 times earnings, according to Thomson Reuters data. An analysis by Thomson Reuters StarMine puts the company’s intrinsic value at a modest $9.72 a share, or about one-third its current value, based on estimates of the company’s projected growth for the next decade.

Earlier in the week analysts, on average, were expecting revenue in the second quarter to grow 28 percent to $1.15 billion.